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Mr. BARKER. My name is Richard Barker. I have offices in the Southern Building, Washington, D. C., and I represent the Bibb Manufacturing Co., of Macon Ga. I ask permission to put my written statement in the record and I will summarize it orally, if I may do so.

The CHAIRMAN. You may do so.
(The prepared statement of Mr. Barker follows:)



The enclosure has been prepared for use in acquainting members of Senate Finance Committee with the status of the pending House legislation pertaining to the suggested revision in the Revenue Code to permit the use of the lower of LIFO cost or market, and in soliciting support of an amendment to the current tax revision bill by the Senate Finance Committee to include this much needed revision.

MEMORANDUM ON H. R. 5295 AND H, R. 5296

There are pending before the House Ways and Means Committee, two bills (H. R. 5295 and H. R. 5296) the enactment of either of which will remove from the Internal Revenue Code an inequity among taxpayers whose taxable income is substantially affected by inventory methods. These bills, by amending section 22 (d) (1) of the Internal Revenue Code, permit a taxpayer who adopts the last-in, first-out method of inventorying, to value his inventory on the generally accepted method of cost or market, whichever is lower, instead of forcing him to use only the cost basis.

On July 21 in the hearings before the Committee on Ways and Means, testimony was given by representatives from all industries urging that the contents of these bills be included in the current tax revision legislation. This testimony included representatives from :

The American Cotton Manufacturers Institute
The American Mining Congress
The American Retail Federation
The National Retail Dry Goods Association
The National Association of Manufacturers
The National Coal Association

The American Institute of Accountants
and many other groups and individual taxpayers.

It is understood that when this item was brought up for discussion in committee, the item was not acted upon favorably, primarily because of a misunderstanding of its principles. Subsequent discussions with individual members of the Ways and Means Committee who opposed the item, clarified their understanding, and they stated they would change their views upon any subsequent action. However, they also stated that it was inopportune to attempt to call for a reconsideration and suggested that the only immediate course of action would be through an amendment originating in the Senate Finance Committee. Hence, the following information is submitted.

The need for this legislation will be evident from the following brief suryey of the present situation with respect to the effect of inventory methods on financial statements and on the amount of taxable income.

Section 22 (d) (1) of the Internal Revenue Code provides that all taxpayers may use the last-in, first-out (LIFO) pricing principles in determining inventory valuations. These provisions were enacted by Congress in the Revenue Act of 1939 for the express purpose of providing a means through which the increased cost of carrying the same required inventory investment, due to price rises, would not be considered business profits.

For 10 years following enactment in 1939, administrative interpretations and regulations issued by the Bureau of Internal Revenue discouraged, and in many instances specifically prohibited the use of LIFO except for very simple inventories.

The Bureau did not broaden its regulations until compelled to do so as the result of several Tax Court decisions in 1947 (Hutzler Bros., 8-TC-14; Edgar A. Basse 10-TC-328, and Sweeney & Co., Inc., 7-TCM-121), which upheld practical mechanics of applying the last-in, first-out method for complex inventories. This was in 1949—10 years too late—and by that time prices had risen more than 100 percent over the 1939 levels. As a matter of fact, the procedural opposition of the Bureau of Internal Revenue to the adoption of the LIFO method of

aluing inventories by taxpayers has not disappeared even today—15 years after Congress acted on the matter. As recently as February 1954, the Bureau issued instructions whereunder for the first time they recognized practical methods whereunder so-called specialty stores could adopt LIFO.

It is this silent but powerful opposition of the Bureau and the Treasury to the approval of sensible applications of the LIFO principle which justifies and merits relief action by Congress at this time. It has been estimated that only about 10 percent of the country's inventories are valued on a LIFO basis. A large part of the remaining 90 percent of the inventories of the country undoubtedly would have elected the LIFO method prior to the present time but for the fact that the Bureau of Internal Revenue either advised the taxpapers that they were prohibited from adopting the method or advised them that, if the method was permissible, the procedures acceptable to the Bureau were such as to make the use of LIFO completely impracticable."

In short, there has been a step by step forced and reluctant retreat by the Bureau and Treasury with respect to the LIFO problem and it is submitted that under such circumstances it is entirely appropriate that Congress should enact relief legislation so that the taxpayers who were misled by the Government can now adopt the LIFO method.

While most of the administrative blocks of the past have now been eliminated, still it is unreasonable to ask a taxpayer to make such an election when all the economic factors indicate that prices are at their cyclical peak. This is occasioned by the fact that the present statute requires LIFO taxpayers to value their inventories at cost rather than at “cost or market, whichever is lower” as is permitted FIFO taxpayers. No one in their right mind would freeze their inventory prices at costs determined at the peak of a price cycle. Thus, while taxpayers who have heretofore been dissuaded by the Bureau tactics from making the election, now, for the first time, have what can be considered a free election, but the timing of the free election destroys its validity.

The Treasury, to date, has indicated orally its objections to the relief bills. It is difficult to understand the Treasury position in the light of the past performance of the Bureau of Internal Revenue. There has been no published statement by the Treasury to the effect that the relief bills would cause any immediate loss of revenues—and it is doubted that any such claim can be validly made in the light of the stationary position of commodity price indices and the fact that if prices go down, the 90 percent not on LIFO under their present inventory pricing basis will write down their inventories accordingly and if prices go up and LIFO is adopted by any of the 90 percent, any income which is thus deferred to future years will be more than offset by the increase in profit from turnover of inventories during the period of acceleration.

Also, prices would have to drop generally about 60 percent below their present levels before the inventories of the 10 percent now on LIFO would be affected so these are not relief bills for those now on LIFO.

The long range advantage to both the Government and the taxpayers from adoption of the amendment to the law can be best summarized by the following twelve points: ?


1 Proof is available that taxpayers were advised that if they adopted LITO they must use so many subclassifications of inventory as to make the method unworkable. For example, one textile concern was advised it would have to set up 24 different classifications of cotton-one for each grade and staple of cotton used even though all their finished goods were coarse carded yarns or fabrics made therefrom. For years the Bureau used pressures to make taxpayers exclude labor costs from their LIFO inventories on the threat that, if included, the taxpayer would have to use impractical subclassifications of goods. Even today th Bureau requires a separate classification of labor costs from material costs even though they are both cost elements of the finished goods. For over 2 years the Bureau has been considering, but to date has not published, a mimeograph advising taxpayers who, because of pressures exerted on them at the time they made their elections. made impractical classifications of their inventories, how they can adjust this situation through the use of the so-called dollar value method. Numerous other detailed examples could be presented which demonstrate the unsympathetic and noncoonerative attitude of the Bureau.

2 See hearings before Committee on Ways and Means, 83d Cong., 1st sess., pt. 1, pp. 633, 634 (McAnly).

1. Encouraging the adoption of LIFO by permitting all companies to use the lower of LIFO cost or market, will provide an opportunity to prevent further paper profit inflation if and when prices go up and thus prevent these additional paper losses if and when prices go down.

2. Giving all taxpayers who adopt LIFO, the right to write down to the current cost or market, will give them no greater deductions from accumulated income than they will have if they postpone their shift to LIFO until a lower price level.

3. Under the present law (without the amendment) all companies not on LIFO now have the right to take write-downs to current cost or market when prices recede and then shift to LIFO.

4. Likewise, under the existing law (without the amendment), new companies which come into existence at high-cost-level periods, will wait until prices recede before adopting LIFO and thus they, too, will be forced to write up their inventories if prices go up before a decline takes place. On the other hand, companies which adopted LIFO early in the picture and have subsequently expanded their operations in the more recent high-cost years, find themselves with large portions of their expanded inventories frozen at these more recent high-cost levels.

5. The amendment to permit the lower of LIFO cost or market will provide the possibility of at least partially eliminating the inequities among taxpayers caused by the restrictive administration of the original LIFO provisions for a period of 10 years subsequent to 1939 during which prices doubled.

6. Over a complete price cycle, the same amount of business profits will be available for taxation-profits are merely shifted to the year in which they are realized—within the cycle. Again quoting from the United States Department of Commerce Survey of Current Business, May 1953, on page 20 :

“Over a complete price cycle total profits before taxes will tend to be similar, for any one firm, under either (LIFO or FIFO) method."

7. For shorter periods of less than a complete price cycle, the effect upon taxable revenues will be to level out profits-a definite benefit to both the business economy and the Treasury. Another quotation from the Survey of Current Business, page 20, of the May 1953, issue is pertinent:

“Another reason for the spread of LIFO is the greater stability of LIFO profits relative to FIFO profits over an extended period. LIFO profits are lower in times of rising prices when profits are typically high. Conversely, reported profits are greater (or losses smaller) under LIFO than under FIFO in times of falling prices when profits are typically low. To many businessmen, the smoother, more stable picture of earnings provided by LIFO is one of the more attractive features of the method."

8. Taxpayers will be able to adopt LIFO for tax purposes and still continue to keep their accounts in conformity with sound business principles and accepted accounting practices, i. e., that income should not be recognized until realized, and that provision should be made for losses when it appears likely that they will occur.

9. It will permit uniformity and clarification of financial reports.

10. The possible shift to LIFO which might be encouraged by the amendment would be a gradual one with a relatively minor effect upon tax revenues in any one year—and then only in a period of rising prices. During such periods, the windfall of taxable realized profits from the effect of price increases as inventories are turned over several times during an annual period, far exceed the unrealized "paper profits" in inventories which are shifted to a future year through LIFO application.

11. It is significant that the United States Department of Commerce in its national income accounting uses a method of inventory valuation which closely resembles the LIFO method. The National Income Supplement to the Survey of Current Business (1951 edition) on page 39 states :

“The LIFO method of inventory accounting yields results most akin to national income practice."

Also on page 21 of the May 1953 issue of the Survey of Current Business, the statement is made that:

“The basic principle of the LIFO method, the charging of current costs to current revenues, is essentially the same as that embodied in national income concepts."

It would seem, therefore, that the LIFO tax law should be amended to remove the obstacle which prevents its adoption by industry generally.

12. Basically and most important of all, it will provide a single method of inventory pricing through which all taxpayers can at all times keep price infla

tion out of inventory valuations, and business profits determined thereunder will be realized profits fully available for distribution as dividends, taxes, etc. Only through the combination of the LIFO order of pricing and the lower of cost or market inventory valuation method can business be conducted in accordance with sound principles and taxation of business profits placed upon the solid foundation of only taxing profits that have been realized.

One other facet of the problem deserves attention. The advocates of H. R. 5295 and 5296 have attempted in every possible way to meet the Treasury representatives more than half way on the proposal to amend the LIFO provisions of the code. On April 8, 1952, H. R. 7447 was introduced by Representative Camp, of Georgia, and on April 23, 1952, H. R. 7554, an identical bill, was introduced by Representative Reed, of New York, in an attempt to effectuate a reasonable compromise of this problem. Representatives of the Treasury had argued that the bills introduced in the present session of Congress (H. R. 5295 and H. R. 5296) gave an indefinite period within which there could be a permanent write-down of costs to market values. Although rightfully no limitation period is a part of the basic principles involved in this problem, since we are dealing with matters of established business and accountig practices, a 5-year permanent write-down period was included in those compromise bills. Such a provision would at least protect the taxpayers from electing the LIFO method at a time when it appears we are at the very peak of the price cycle.

The advocates of the bills introduced during the present session are still willing to accept the compromise proposals. They cannot believe that the present Treasury officials would oppose the compromise if they were fully aware of all the numerous impediments strewn in the taxpayers' path in the past with respect to the right to use, and methods of application of, LIFO.

Mr. BARKER. There were introduced in the House last year two bills, identical in form, H. R. 5295 by Mr. Byrnes of Wisconsin, and H. R. 5296 by Mr. Camp of Georgia. The purport of these two bills was not included in H. R. 8300. They deal with a revision of section 22 (d) of the Internal Revenue Code, dealing with the method of costing inventories and more particularly whether or not “last in, first out” taxpayers should be allowed the privilege that "first in, first out" taxpayers are allowed i. e., of costing their inventories at cost, or market, whichever is lower.

May I say that the purport of these bills is backed by such associations as the National Association of Manufacturers, the American Retail Federation, the National Retail Drygoods Association, the American Iron and Steel Institute, the American Cotton Manufacturers' Institute, the American Mining Congress, and the National Coal Association.

The CHAIRMAN. What is the thing that you are trying to do?

Mr. BARKER. Specifically, what we are trying to say, Senator, is. this: That under the Internal Revenue Code, taxpayers are entitled to use their first in, first out,” or “last in, first out," as a method of evaluating their inventory. For years, "fi-fo” taxpayers have been allowed to use cost or market


“ whichever is lower. Whereas, "li-fo" have been restricted to the use of cost in pricing out their inventories, and are not entitled to use market when market is below cost.

The reason why we feel this relief provision should be included in the Internal Revenue Code is because, frankly, although Congress passed provisions in section 22 (d) entitling taxpayers to use "li-fo” in 1939, the administration quietly and subtly was opposed to the use of "li-fo” and frankly blocked it in every possible way.

Now for example, I know that my particular client, the Bibb Manufacturing Co. came up here in 1941 or 1942 and inquired as to how it could utilize the “last in, first out” method of valuing its inventories.

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They were advised that if they wanted to use “li-fo" they would have to split up their inventories into so many subclassifications, as to make the use of it impractical.

For example, for 10 years, the Bureau of Internal Revenue told department stores that they couldn't use "li-fo” and it wasn't until we took a test case to the courts and fought it out in bitter litigation that the Bureau was told that they were wrong and that Congress intended that all taxpayers had the right to use “li-fo" and the Bureau of Internal Revenue had no right to say that any particular group or class of taxpayers could not use it.

For 10 years, the Bureau fought a practical method of applying "li-fo” where labor costs were used in determining the value of the goods. It was not until January or February of this year, 1954, that the Bureau came out with regulations permitting specialty stores to use "last in, first out” methods of valuing inventories on a practical basis. The Bureau has had under consideration for 2 years a mimeograph, which is not yet issued, advising more complicated businesses of the practical methods of using indexes for valuing their inventories. So there has been this opposition by the Bureau and the Treasury Department to the advising of taxpayers of practical means by which they could use this “last in, first out" method of valuing inventories, with the result, Senator, that only about 10 or 15 percent of the taxpayers of this country have taken advantage of the provisions of law that Congress put into the Internal Revenue Code in 1939.

Now under these circumstances, we maintain that it is only fair and equitable to give those taxpayers who were dissuaded from using “li-fo” an opportunity to go on and take advantage of that provision of the Internal Revenue Code. But no taxpayer in his right mind is going to elect to go on “li-fo” at the time when your price indexes are at a possible peak, because if we are restricted to using cost, as the statute now requires, we will have our costs frozen and if there is a recession in the price indexes, we will have to continue to carry them at cost, whereas "fi-fo" taxpayers can write them down to market.

Now the provisions of these two bills, H. R. 5295 and H. R. 5296, which are identical, provide that taxpayers can, on the "li-fo” basis, use cost or market, whichever is lower, just as "fi-fo" taxpayers can use it. I must say, I understand the Treasury is opposed to these bills. I must also say there was a difference of opinion in the House Ways and Means Committee as to whether the provision should be put into H. R. 8300. I do want to call attention, however, to the fact that 2 years ago, largely with the help of Mr. Stam's office, a compromise bill was drafted in the 82d Congress, H. R. 7447, by Mr. Camp, and H. R. 7554 by Mr. Reed. The compromise bill doesn't say that “li-fo” taxpayers can write down their inventories to cost or market, whichever is lower, on a permanent basis, but it does say because of the past inequitable administration of section 22 (d) of the Internal Revenue Code, taxpayers for a period of 5 years shall be allowed to write down their inventories to cost or market, whichever is lower, and establish a new low-cost base.

After the 5-year period, while they can still write down to market, if the market goes below cost, thereafter if prices risę, they will pick up income so that there will be no permanent loss of revenue to the Treasury Department.

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